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Teaching The Family How To Invest-Part Five


I might not always be around to manage our investments.

Neither my wife or our daughters are interested in taking over.

A little bit of education is in order.

While I may write more for them later, here's the 4th installment.


In this lesson, we will discuss the three largest types of Investment Accounts: Tax advantaged accounts, Taxable accounts and Roth accounts. We will also talk about Pensions which may be provided by your employers.

Most of your investments while in your 30's and 40's will likely be in Employer Sponsored Tax advantaged accounts, commonly known as 401 K's. Most will provide matching dollars to what you invest. A common match will be up to 5-6% of your income. Some will match you dollar for dollar. Let's assume you earn $50,000 a year. If you are paid bi-weekly your earnings are 1,786. You invest 5% of your income or $89 each pay period. Your company matches that and another $89 is added.

The good thing about 401K's beside the match is that the money is removed from your paycheck automatically.

A bad thing about 401K's is generally the smaller the company, unit of government or non-profit is that you work for the fewer the number of investment options, particularly those with low management fees, are available.

It is common if you change employer to "roll over" or transfer those dollars to the management of your new employer's investment firm. You do however have the option of doing a transfer to a Self-managed account. More about that later.

While you can opt to tap your 401(k) at any time, you’ll pay a huge penalty to do so before age 59.5.


Your job may or may not include a Pension. It is important to understand how your pensions is "vested".

There are two basic types of vesting. Find out which applies to your work situation.

Cliff. This typically means that if you leave the job in five years or less, you lose all pension benefits. But if you leave after five years, you get 100% of your promised benefits.

Graded. With this kind of vesting, at a minimum you’re entitled to 20% of your benefit if you leave after three years. In each subsequent year, another 20% of your benefit vests. So if you stay for four years, you are vested in 40% of your benefit and so on; by the end of year seven, you are 100% vested in the plan, so you can leave the job knowing that you will get 100% of the pension benefits earned.

You can’t collect your pension until you’ve reached the retirement age determined by your pension plan. Typically full retirement is age 65, though many plans allow an early retirement that could start as soon as age 55. If you decide to start receiving benefits before you reach full retirement age, the size of your monthly payments will be less than it would have been if you’d waited. Ask the folks who run your plan to create a simple table showing you how your payments will vary depending on when you start.

While you have no control over the amount available to you in a pension benefit plan, you usually get to choose whether to take the cash all at once, in a lump sum, or as a monthly payout, also known as a “life annuity.”

As to which is better: it depends.

Most people choose a monthly payout, and with good reason: Having that steady income can make for less stress than taking a big lump sum, especially if you aren’t an experienced investor.

That said, taking a lump sum has advantages. Chief among them: you gain control over the money. You can roll the funds into an IRA and invest it however you like.


Age 50 - You can begin to make catch up Contributions to your 401k.

Age 59 1/2 - You can chose to remove your contributions to your plan and roll them over (move them) to an IRA that you direct or control. You can then choose to invest in individual stocks or low fee ETFs again of your own choosing. You may find you save a considerable amount in advisor fees if you do. 




Limit on employee contributions to 401k, 403b, or 457 plan




Limit on age 50+ catch up contributions to 401k, 403b, or 457 plan




Traditional and Roth IRA contribution limit




Traditional and Roth IRA age 50+ catch up contribution limit